Tax audit of transfer pricing cases derived from intangible assets: a study of selected tax court cases in Indonesia
In the absence of market forces, transactions between affiliated companies can lead to distortion of the amount of tax that should be paid to government. The OECD introduced the ‘arm’s length’ principle, which uses comparable transactions to overcome that problem. However, identification of comparable transactions, especially for intangible assets, is very challenging. The objective of this research is to investigate how Indonesian tax auditors cope with transfer pricing cases derived from intangible property. Qualitative methodology was deemed most appropriate and a case study approach was adopted. The methods used were document analysis and interviews. A combination of thematic analysis and document analysis was then employed to analyse the data.
This study finds difficulties faced by Indonesian tax auditors during the audit of transfer pricing cases derived from intangible property include: a lack of transparency in bookkeeping; limited taxpayer cooperation in providing data and documents; current regulations; and problems related to organisation and human resources. The study also finds that Indonesian tax auditors and tax officials cope with transfer pricing cases derived from intangible assets by using legal bases, e.g. Article 18 paragraph 3 of the Income Tax Law and domestic regulations, contracts entered into among affiliated enterprises, and OECD transfer pricing guidelines as references; and by role specialisation: i.e. tax auditors, heads of district tax offices, the head office of the Directorate General of Taxes, and account representatives all have distinct roles.
The study suggests that Indonesian tax auditors perform the following tasks: conduct in-depth analysis of taxpayers being audited, seek evidence of the existence of intangible property owned by taxpayers, classify intangibles, look for evidence of benefits received by taxpayers from intangible property, find comparables for intangible asset transactions, find ‘arm’s length’ prices for intangible asset transactions, verify transfers of intangible property, verify the entitlements of intangible property. Further, the study also finds that the head of the district tax office acts as leader and inspiration for tax auditors in performing audits, and as quality assurance for audit work. Moreover, the study finds that the role the head office of the Directorate General of Taxes commences when the Directorate of Tax Audits and Collections, and the Directorate of Tax Regulations II, coordinate with each other in providing assistance to the tax auditors who carry out transfer pricing audits, and in interpreting transfer pricing rules and regulations. The Directorate of Tax Audits and Collections also coordinates with the Directorate of Tax Objections and Appeals in reviewing decisions of tax courts what are unfavourable to the Directorate General of Taxes. Finally, the study discovers that the account representatives provide support to the tax auditors handling transfer pricing cases in providing data and in-depth analysis on transfer pricing cases, before taxpayers are officially audited by tax auditors.